In a reminder that the inflation beast is never fully tamed, but can at best be forced to retreat temporarily, wholesale price inflation in India jumped to a 42-month high of 8.3% in April. That’s more than double the previous month’s 3.9% and a far cry from the 0.9% recorded a year ago. The longer global oil supply remains disrupted, the likelier it will go into double digits.
And with diesel and petrol filling-station prices hiked only in May (and more hikes likely), it is just a matter of time before retail inflation, already at a 13-month high of 3.5% in April, increases.
The government can absorb some of the Gulf war’s impact on household budgets, but not all.
Add to all this the fear of El Niño conditions and sub-par monsoon rains impacting food supplies, and there’s no getting away from cost-of-living worries across the country in the foreseeable future.
India is not alone in this. Globally, prices are heating up. In the US, retail inflation at 3.8% in April is the highest since May 2023. The UK’s March figure is 3.3%. Both are above their 2% target.
Bond yields have risen in tandem: US 10-year Treasuries now yield 4.6%, the highest since last May, while the yield on 30-year bonds rose above 5.1%, its highest closing level since July 2007. The yield on India’s 10-year government securities is nearing 7.2%, the highest since end-April 2024.
The April edition of the International Monetary Fund’s World Economic Outlook warns that global headline inflation is expected to rise to 4.4% in 2026 before declining to 3.7% in 2027, an upward revision for both years.
It is in this context that Prime Minister Narendra Modi’s call for austerity and dire warning of a decade of disasters that could see “a huge section of the world’s population pushed back into poverty” must be viewed.
Given an energy crisis that still has no end in sight and India’s huge import dependence, cutbacks are inescapable. Our widening current account deficit is a danger signal we cannot ignore. In trade terms, it reflects the country’s over-consumption; with capital inflows thinning out, a trend observed even before the war’s outbreak, that gap bears down on our external finances all the more heavily.
Collective belt tightening should help correct an external imbalance, relieve the rupee of downward pressure and contain imported inflation. Agreed, consumption will take a hit. Possibly economic growth too. But some short-term pain is inevitable. We must brace ourselves for it.
Like during the covid pandemic, fiscal and monetary policies must work in tandem to protect the most vulnerable. Where fiscal support is deemed necessary, it should be well targeted, timely, temporary and funded by re- prioritized spending. Where that is not possible, the path to restoring a fiscal balance must be clearly communicated.
Monetary policy is more broad-brush in its approach. So the classic defence—higher interest rates—must be balanced with appropriate macro-prudential measures to limit any damage to GDP growth. Price flare-ups led by supply shocks tend to exact a particularly painful cost as restoring stability could require a sharp rein-back of demand. Yet, the central bank must not risk a failure to meet its price-stability mandate, as it did for a three-quarter span in 2022.
As the poor are the hardest hit by inflation, policymakers must stay extra vigilant. The Prime Minister’s concern about poverty should be taken as a call to protect the vulnerable.